FOMO is wrecking your portfolio

• Researchers analysed 25 million trades by 250,000 users on a leading social trading platform.
• Copycat investors often take on higher-risk trades that end up losing money.
• Investors should focus on diversified, long-term strategies for sustainable returns. 

Investors who copy top traders on social platforms are losing money because fear and envy drive them to take speculative risks. 

Social trading platforms such as eToro and Zulutrade have become popular since the pandemic, featuring leaderboards that showcase online trading stars.

The concept allows everyday investors to mimic trades in the hope of cashing in on someone else’s success.

But a study analysing more than 25 million trades in stocks, cryptocurrencies and fiat currencies found that copycat traders are succumbing to emotions that push them to make riskier trades that hurt their profits.

The findings come as millions of younger investors turn to social platforms for trading advice, fuelling meme-stock surges and market swings.

Associate Professor Tim Hasso of Bond University said the research team collaborated with a major social trading site which provided anonymised data from 250,000 users from January 2016 to December 2017.

“We found that when investors see their peers making big, sudden profits, they feel a need to keep up – a bit like ‘keeping up with the Joneses’,” Dr Hasso said.

“This triggers a chain reaction where they trade more, take on more risk, and in the end, they perform worse.”

Dr Hasso, of Bond University’s Centre for Data Analytics, said some social trading platforms may be encouraging risky behaviour, intentionally or not.

“Our findings strongly suggest these platforms create an environment where impulsive and emotional behaviour thrives,” he said.

“The entire system is built on making trading performance visible and social. 

“When someone has a big win, it's broadcast to their network which can trigger FOMO (fear of missing out).”

Dr Hasso urged the platforms to consider implementing features that protect their users. 

“Instead of just showing off huge, rare wins, platforms could show risk-adjusted returns or long-term median performance,” he said.

“This would give a more realistic picture of an investor's skill, versus their luck.”

Dr Hasso said that while social trading platforms add excitement to investing, sustainable returns come from a long-term strategy and diversification.

“Many social traders hold very few assets, making them vulnerable,” he said. 

“Instead of trying to find the next big thing, focus on building a diversified portfolio.

“It's a less exciting but far more reliable path to building wealth.”